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The Minimum Wage: Good Intentions, Bad Results

The current debate over raising the minimum wage provides a perfect example of how little results seem to matter when compared to good-intentions.

File:Unemployed men queued outside a depression soup kitchen opened in Chicago by Al Capone, 02-1931 - NARA - 541927.jpg Unlike many proponents of raising the minimum wage, I do not question their intentions.  Most everyone who supports minimum wage laws genuinely believes they protect the worker against “exploitation,” decreases poverty, and provides a “livable wage” to the youngest, poorest, and lowest-skilled among us.

The tragic irony is that the very groups which these good-intentions are directed end up the most negatively affected.

Walter Williams put it succinctly, “The best way to sabotage chances for upward mobility of a youngster from a single-parent household, who resides in a violent slum and has attended poor-quality schools is to make it unprofitable for any employer to hire him. The way to accomplish that is to mandate an employer to pay such a person a wage that exceeds his skill level.”

Most people do not earn the minimum wage their entire lives.  In fact, according to data from the Employment Policies Institute, about two of every three minimum wage earners get a raise within one year.  Through education and work experience, individuals acquire new skills and are able to compete for higher wages.  But if someone is unable to obtain employment, even at a low wage, they are unable to develop the marketable skills necessary to advance beyond the minimum wage.

This traps the poorly-educated and the lowest-skilled at the bottom.  For these people, raising the minimum wage will only hurt their chances of gaining employment.

As Milton Friedman noted, ‘The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.’

Industries vary, and therefore, higher labor costs are offset in different ways.  One way to lower labor costs is to lower the amount employed.  If the minimum wage is set higher than the productivity of an employee, the business would take a loss employing them.

If reducing the workforce is impractical, benefits may be reduced, or, the price of the product or service may increase.

If a baker produces $8 worth of bread each hour, but is required to be paid $9 an hour, by artificially inflating the price of a loaf of bread, the baker can now produce $10 worth of bread each hour and is again able to justify his or her wage.

But the result is higher prices – not only on bread – but innumerable products and services.

The minimum wage earner may be able to offset some of these higher costs with higher wages, but only at the expense of the non-working poor, who pay higher prices for essentials with no such compensation.  (This is also true of every worker who earns more than the minimum wage.)

Higher prices on consumer goods are terribly regressive.  A rich person may not care if a loaf of bread that was $3 yesterday is $4 today, but to the poor, who expend most of their income, higher prices amount to an onerous tax.

Despite the poor results, the minimum wage will likely be raised.  The good-intentions it represents will be enough.  Once it is agreed that the desired effects have not materialized, there will be calls to raise it again.